World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Saturday, August 1, 2009

Chris, who is an outstanding communicator, just wrote two columns on yesterday’s GDP report. BOTH are excellent.

The first I really like as he lays out a map of believability when it comes to government reports, I excerpt it below the link… please take the time to follow the links, though, and understand all of Chris’s points:

As I tell people in my seminars, I divide my data (or facts) into three buckets: good, murky, and unreliable.Into the good bucket I put all sources of data fitting the following important criteria: The data itself is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.

Into a bucket of lesser importance goes the murky data. This data is based on sampling, usually conducted by self-interested parties (National Association of Realtors data for example), or is seasonally or statistically adjusted, and/or does not square up with other, better data.

Into the final bucket goes the utterly unreliable 'data,' so bad that I need to use quotes around it. This 'data' is modeled or otherwise manufactured out of thin air with no accountability, does not square up (at all) with good sources of data, has massive errors in methodology that have never been explained, consists of survey data for reasons covered in an earlier Martenson Report (Survey Says...), is self-referential (e.g. LEI or 'leading indicator' data), and/or has been proven repeatedly in the past to be consistently biased for political or self-serving gain.

Unreliable Data

• New home sales data• Employment data (due to the Birth-Death model)• All survey data• Leading indicator data• GDP (just added to list)

This is a terrific way of thinking about the data and I agree completely with Chris’s categories. I would add, however, the big one – INFLATION DATA – which definitely belongs in the Unreliable Data Category! Also, all data pertaining to derivatives is in a category I would classify as UNKNOWABLE because of the total opacity.

Chris’s second article is also excellent. Below is a link and his summary, it’s also a great read if detailed information on the GDP report interests you, and I hope it does. The manipulation and lies reside there:

So here again I will ask, how is it possible for business revenues to be down by some 15% while PCE is down by 2%? As I stated before the answer lies in the extrapolated and guesstimated portions of the GDP report where a consistent and non-random positive bias lurks, unnoticed and unquestioned, in dozens of nooks and crannies.

Because of this, basing large scale, long-term investment decisions off of the GDP report is done at your peril.

Fleetwood Mac-Little Lies:

Once again, here's my slightly more dramatic overall summary of government statistics (except for tax collections, note that none of the GOOD DATA above comes from the government!):

The BEA, the BLS, in fact ALL government reports are suspect. All reporting of government statistics should be scrapped. The Fed should be abolished, The central banks and bankers should be removed – as in gone, a new money system should be put in place, there should be a Constitutional Amendment dictating the SEPARATION OF CORPORATIONS AND THEIR MONEY FROM STATE, and finally, there should be a new government agency responsible for collecting and reporting economic statistics and that agency should have a mandate to develop data collection methods that cannot be changed over time and there should also be a mandate to release RAW DATA with every report, there should be absolute transparency in that all the calculations and all collection methods should be easily viewable by anyone. Oh, and NO ONE, not even the President should have access to the information before the public!

Max is definitely on the edge with this interview – “take the battery out of your cell phone if you don’t want to be overheard,” LOL! Hey, you’re not paranoid if they really are listening! What a kick.

Anyway, Dmitry has done a lot of writing about the collapse of the Soviet Union and he thinks the Loosely United States may be in for some of the same action. Food for thought.

The last video is an interview of “Dr. Housing Bubble.” The option arm and alt-A bubbles are just now getting into the meat of their recasts…

Peter uses his usual common sense in talking about a myriad of issues. While I agree with about 95% of what he’s saying, the one line I don’t necessarily agree with is that Asia, and in particular China, has strong fundamentals. In fact they have self-induced bubble fundamentals.

But I did like his take on the “cash for clunkers” debacle and was just thinking last night how ridiculous that program is. Americans should be outraged that the government is handing over OUR MONEY so that our neighbors can go out and buy a new automobile that is inflating the PRICE of both new and used autos while giving billions to automakers and indebting all of America and in particular those who are trading in their “clunkers.” And Schiff brings up even more distortions that are created by such a lunatic program.

We have definitely entered the realm of Wonderland, that’s for sure. Economic Mass Psychosis abounds, but Schiff does a good job of pointing out the lunacy of it all.

Friday, July 31, 2009

While the Quant Wizards and Financial Engineers on Wall Street are busy pumping stocks, the media is generally right there with them to get the pump going. Always and forever “never been a better time to buy!” “Buy, buy, buy!” On credit, of course.

Last fall the stock market gave most everyone a new found sense of reality – right? That’s why the market today is so connected to reality as reflected in this chart by the Federal Reserve showing the price of the S&P 500 along with the Price to Earnings:

Oops! I guess that despite the pumping, earnings in the real world have been plummeting while the market has been turning higher (huge rally, see that teenee tiny turn up following that HUGE cliff dive?). Uh huh. So the worst must be over for the REAL economy, right?

I mean banks now get to mark their sliced and diced toxic waste derivative products to whatever value they feel is convenient and happens to maximize their bonuses, of course, yet their marking to fantasy is carefully balanced against the need to avoid reporting too high of earnings lest the citizenry respond with torches and pitchforks.

But I digress…

I’m here to talk about motorcycles (vrooooom) which are a part of the REAL economy. You know, stuff that someone actually has to make, not just print out from a laser jet. No fluff here, no sir!

No, never has been…

By the way, I found an old picture of Nate on his bike:

And here’s a picture of Arno on his latest machine…

Anyway, the point of this article is to point out that motorcycles sales, unlike marked to fantasy derivatives, are in fact not rising at all like the stock market, they are plummeting more like… well, lemmings over a cliff:

No, Wait! Ahhh, no, that is a chart of the dang dyno machine test of a bike that was obviously of inferior design! Sixty-two horsepower, give me a break. Must have been for a "modern" Harley. Did you know that Harley, just this year, began to offer Anti-skid breaking as an OPTION? How quaint.

Here’s the chart I really wanted to show you, it’s a chart of U.S. motorcycle sales from 1992 through 2008. This chart is a typical exponential rise that went along with the Baby Boom generation for the greatest expansion of credit in the history of mankind!

The only problem with charts like that is that on the backside of the parabolic rise there is usually a collapse with the back side of the curve much steeper than the front side.

So, how are sales doing so far in 2009? According to webbikeworld.com, not very good:

The numbers aren't looking good for the first six months of 2009 compared to the same time period in 2008. Sources tell us that street bike sales for the first two quarters of the 2009 year so far totaled 212,130, down 46% from the same time period in 2008. Dual sport sales are down 47%; off-road motorcycle sales down 37% and scooter sales are down a whopping 67% from the first 6 months of 2008.

Meanwhile, some numbers from Japan indicate motorcycle production in May 2009 was down 28,445 units or 40.9% of the May 2008 number of 69,626 units produced. Motorcycle exports from Japan in May 2009 totaled 33,845 units, down 28,203 units or 45.5% of May 2008 figure of 62,048 units.

Just for comparison, Japanese automobile exports in May 2009 were 233,217 units, down 295,400 units or 55.9% from the May 2008 figure of 528,617 units.

Overall sales down 47% year over year? Yowzaa! Now that’s cliff diving and would make that chart above look a whole lot worse.

Kind of like this weekly chart of Harley Davidson stock (HOG):

And the only reason it’s not down more to match actual profits, is that Warren Buffett via Berkshire Hathaway, invested $600 million in HOG back in February which helped to produce the bottom that you see coincident with the general market in the first part of March.

Why would Buffett do that? Well, for starters he was able to charge a usurious 15% rate of interest that only Guido would formerly be involved with. And secondly, he’s getting old and his mind is obviously slipping. Thirdly, he’s never really ridden behind a HOG and watched the pieces vibrate off the machine! But he can be forgiven for that as he is also evidently unaware that the rise of Harley sales was largely based upon the image making ability of their marketing department who catered to a gluttonous bubble of Baby Boomers who were busy pulling their future incomes forward in time via the DEBT in which they were collectively swimming.

This bubble of Boomers has PEAKED, as any thinking investor is well aware or any non-thinking investor who has read Damning Demographics would know.

Speaking of demographics, it might surprise you to learn, according to webbikeworld, that 90% of new bike riders are male, 9% are female, and 1% are other! Surprise to me! Heck, I would have thought it the opposite because scrolling through the pictures of motorcycles on line, like I do, you will primarily find women in bikinis obviously enjoying their bikes!

Honestly, you need only look at market share to know that Economic Mass Psychosis is firmly entrenched:

And remember that peak earnings/peak spending occurs statistically at the age of 48.5 here in the Somewhat United States. Not surprisingly, the largest segment of riders occurs at that same age range and declines steadily from there as they age. With the Baby Boom Generation now entering the backside of peak, what effect do you think that will have on sales going forward, Mr. Buffett?

I guess he’s too busy working deals with Goldman and telling everyone to buy stocks. Maybe he’ll get back to us later, being the warm hearted protector of the masses he portrays on teevee.

Anywho, I just thought I’d share a little piece of good economic news with you, the sheeple of these great Untied States.

Have you ever noticed that there are two types of closings that you get from people who ride motorcycles? There are the ones who say, “Ride it like you stole it!” And then there are the more practical ones, like Andy Rooney, who would say, “Ride Safe.”

Allow me to share Point's post with his quick summary of revisions of the WORTHLESS GDP numbers:

Cliff notes version:

Inventories were cut MORE in Q2 by businesses than in Q1, $141.1 vs. $113.9. No green shoots there.

GDP has now *officially* been negative for five of the past six quarters. And Q1 was revised waaaaay lower, even lower than the *advance* estimate we received in late April, -6.4 vs. -6.3, making Q1 of 2009 WORSE than Q4 of 2008 (at -5.4), the opposite of what had been previously assumed. No green shoots there.

For 2008: Q1 was revised sharply lower, to -.7 from .9; Q2 to 1.5 from 2.8, and Q3 to -2.7 from -.5. No green shoots there.

Gross private domestic investment fell for the seventh quarter in a row, the past three quarters seeing declines of 24.2, 50.5 and 20.4 respectively. Residential fixed investments have now been negative for a stunning 14 consecutive quarters, with the past 13 showing double-digit declines. The past three have shown retrenchments of 23.2, 38.2 and 29.3 respectively. No green shoots there.

What has picked up the slack? Why government spending, of course. This was most pronounced in Q2 2009. Gov't consumption and expenditures rose 5.6. At the Federal level, spending rose a whopping 10.9 in Q2, national defense jumped 13.3 (more wars anyone?), nondefense jumped 6.0 while state and local government spending climbed 2.4. Yes, bankrupt governments across the land INCREASED spending in the prior quarter. That's smart. You can call these numbers green shoots if you are a corporate-fascist-state admirer; that's your prerogative, Bobby Brown.

So there you have it. Once again, down is the new up.

Since both Point and myself are so tired of having to write about their revisions instead of the economy, I’m going to repost Chris Martenson’s Chapter 16 of his Crash Course . Chris’s video is simply an EXCELLENT summation of the distortions which are now even MORE distorted than when he made this video…

As Davos, at Chris Martenson’s site, says, “What an Enron farse!” On that I agree completely.

I’ll repeat what I said in the previous post: The BEA, the BLS, in fact ALL government reports are suspect. All reporting of government statistics should be scrapped. The Fed should be abolished, The central banks and bankers should be removed – as in gone, a new money system should be put in place, there should be a Constitutional Amendment dictating the SEPARATION OF CORPORATIONS AND THEIR MONEY FROM STATE, and finally, there should be a new government agency responsible for collecting and reporting economic statistics and that agency should have a mandate to develop data collection methods that cannot be changed over time and there should also be a mandate to release RAW DATA with every report, there should be absolute transparency in that all the calculations and all collection methods should be easily viewable by anyone. Oh, and NO ONE, not even the President should have access to the information before the public!

Say goodbye to July, it’s been a very hot one in the great northwest and it’s been hot in the markets too. Too hot. Look at that P/E ratio - can you say, "market distortions?" I though you could!

How about, "government gone wild?"

And the markets are selling off on the GDP release this morning (but now bouncing back), gee, do you think maybe Goldman’s computers had the data a little early yesterday afternoon when the markets tumbled out of nowhere? I think the many insiders who surround Obama must have also whispered in his ear as he was talking like he knew the number already, which I’m sure he did.

The MANIPULATED GDP result came in at -1% for the second quarter of 09. Here’s Econoday’s take, I’ll get to the manipulated part in a minute:

HighlightsThe economy is coming closer to the end of recession based on the advance estimate for second quarter GDP. The economy contracted in the second quarter by only 1.0 percent, following a revised 6.4 percent drop in the first quarter. The second quarter was close to the market consensus for a 0.7 percent dip. Today's report contains historical benchmark revisions to GDP. The previous estimate for the first quarter decline was 5.5 percent.

Weakness in the current quarter was almost offset by component strength. Pulling down GDP in the latest quarter were business fixed investment, housing, personal consumption, and inventories. Strength was found in a sharp narrowing in the trade gap and a rebound in government spending.

But what led to an easing in the rate of decline-where was the second derivative positive? The slowing in the rate of decline in the latest quarter was due to a slowing in the decline in inventories, less negative business fixed investment, less negative housing, a gain in government spending, and a narrowing in net exports. The big negative was a drop in personal consumption.

On the inflation front, the GDP price index rose a meager 0.2 percent after gaining a revised 1.9 percent in the first quarter. The first quarter increase previously had been estimated to be 2.8 percent annualized. The consensus had expected a 1.3 percent gain for the second quarter.

The historical revisions to GDP broadly show the current recession was deeper than earlier believed. All but one quarter of the recession was revised down.

Looking ahead, low inventories point to a rebound in production in the third quarter with motor vehicles almost certainly to be a sizeable contribution. However, the consumer will likely lag. Markets should like today's numbers since it strengthens the case for a rebound in the second half and possibly even the third quarter.

Now I’m going to tell you that the GDP figure is so tampered with that it has NO CONNECTION TO REALITY AT ALL. The distortions begin with the manipulated inflation readings which translate into malformed “deflators” that are used to calculate the GDP numbers. And the absolute last straw, as far as I’m concerned, is the latest manipulation via revisions from the BEA (Bureau of Economic Analysis). Here’s their latest report: News Release: Gross Domestic Product (GDP) .

Scroll down to the bottom of the page and you will find their explanation of the revisions to our growth history all the way back to 1929!

So get this;

- revisions from 1929 all the way to 2008 are revised HIGHER by .1%...

- In 2008, they revised GDP DOWNWARDS from 1.1% growth all the way to only .4% growth, meaning that the economy was much worse than you were told – again.

- To throw salt in that wound, from Q4 of ’07 to Q1 of ’09 (the last reported quarter), real GDP decreased at a 2.8% rate versus the previously advertised decrease of 1.8%!!! How big is that? It’s a 56% downward revision in GDP for the entire period of the bear market so far!! 56%!!!

Are you kidding me? Do you believe what they are telling you about today’s GDP? I don’t. All I can say is that the data is WORTHLESS. It now has no meaning and no connection to reality. You cannot even compare today’s numbers to history to come to any rational conclusions.

The BEA, the BLS, in fact ALL government reports are suspect. All reporting of government statistics should be scrapped. The Fed should be abolished, The central banks and bankers should be removed – as in gone, a new money system should be put in place, there should be a Constitutional Amendment dictating the SEPARATION OF CORPORATIONS AND THEIR MONEY FROM STATE, and finally, there should be a new government agency responsible for collecting and reporting economic statistics and that agency should have a mandate to develop data collection methods that cannot be changed over time and there should also be a mandate to release RAW DATA with every report, there should be absolute transparency in that all the calculations and all collection methods should be easily viewable by anyone. Oh, and NO ONE, not even the President should have access to the information before the public!

Thursday, July 30, 2009

Each month the St. Louis Federal Reserve issues a report on Monetary trends. August’s (covering the month of July) is below containing the very latest data from the Fed. Frankly, it’s frightening and historic what is happening to our economy – while money is being produced like there’s no tomorrow (for the dollar that may be true), the rest of the story is not for the faint of heart.

Take a look at the charts contained in this report and I’ll break out the exciting ones for you below:

Let’s start by looking at the Adjusted Monetary Base as expressed in percent change from one year ago. Base money is the most narrow measure of money supply (mostly cash and reseves) and it has basically doubled from one year ago. But is that trend continuing and sustainable?:

Next, let’s look at the Adjusted Monetary Base expressed in percent change at an annual rate. When we look at these changes two different ways, we see that the base is up from one year ago, but is currently falling at a rate nearly the equal of last fall’s:

This next chart shows PRICE DEFLATION, not price inflation with the CPI in negative territory, but EXPECTATIONS are disconnected from reality, expecting inflation all along, and recent expectations rising further against reality:

A real economic recovery would be one where the debts are cleared. Take a look at what is happening to Federal Debt. Suicide by Government:

To compensate for all the money that must pay back debt, the government prints and prints. Look at the percent change from one year ago in the money supply figures:

Yet, when we look at them in percent change at an annual RATE, we see that only cash and equivalents (M1) is moving up, the broader aggregates are moving down!

And even though we’re printing like crazy, overall inflation is NOT happening as the base money velocity is CRASHING at a 70% +/- rate! Look at the charts below, you will not see anything like it in the previous recessions, and THAT is a huge difference:

Nonfinancial Commercial Paper (loans) are plummeting, losing more than 20% from one year ago. Growth in Consumer Credit is negative for the first time since 1992:

Here are the charts of Velocity for M2 and MZN – a steady and sharp decline into historic low figures. Money does not turn over when it must be used to service DEBT. The harder the Fed pushes money into the system with DEBT, the lower velocity goes and that counters their efforts. Do it too much and it becomes a death spiral:

And the graph that should have all the greenshoot toker’s attention is this chart showing the S&P 500 against its Price to Earning’s ratio. This chart is current up through July 15th and shows how disconnected the market is from actual earnings. Earnings have been PLUMMETING while the market price has been soaring (but look at the rally in proportion to the collapse) creating a huge disconnect all the way to HISTORIC P/E ratios:

I think I’ll leave the equity buying to Goldman’s computers. Have fun with that!

Subtitled, “The 3rd Century economic collapse. Are there lessons from the past that equal solutions for the future?” Martin takes us on a 3rd century history lesson and combines his knowledge of cycles, waterfall collapses, rule of law, history of money and how it influences the political arena to say, YES, it can and is happening to us now… BUT if we are smart we can learn from history to avoid repeating our mistakes.

While I’d like to think we are that smart, collectively I’ve concluded we are not. No, we are experiencing “economic mass-psychosis” and I have yet to see any mass awakening, that’s for sure!

This is an excellent piece, a terrific read, and I hope you enjoy and learn from it!

By the way... 31 months from the October 2007 high equals May of 2010.

*To PRINT, click “more,” then “print.” You can also click "more" then "save document" to open in YOUR .pdf viewer where you can either save or print.

Sherman Okst, AKA “Davos” at ChrisMartenson.com (AKA “Fear Monger,” LOL), wrote a very interesting piece that I am proud to share with all my readers. Sherman has been a big supporter of my site and I appreciate that very much!

Of course it helps when he sends me emails with things like, “…What you brought to light I think is the most important piece of news of the century.” LOL, yeah, not being able to fund our debts will, in fact, lead to the eventual demise of the current version of the United States, so yes, very important!

How we get from here to there, though, is obviously a matter of debate, one that Sherman and I will voice differing views on. And that’s okay, we BOTH have open minds about it as we know we don’t control the decisions of policy makers and thus the PATH to the ultimate destination is still an open question…

That isn't my line, I didn't coin it - though I wish I did. But I'd like the opertunity to expand on it.

I read it in Secretary Paul O'Neill's book, he was our 72nd Treasury Secretary and I would say he was the best Treasury Secretary we ever had.

Mr. Cheney fired him.

Thanks Dick!

Mr. O'Neill recommended massive tax hikes, massive spending cuts and an attempt to balance a deficit before it got to $500,000,000,000.00. As of March 2009 the CBO is forecasting a deficit of $1,850,000,000,000.00.

It got away. We went from 500 billion to close to 2 trillion in just a few years. Like Dr. Al Bartlett says, 'Most people do not understand exponential growth, yet the concept is of fundamental importance.'

Mr. O'Neill, like I and many other bloggers, believe that deficit's DO matter. We are now at a point where one week of bond auctions amount to half the budget deficit that Mr. Oneill advocating containment of.

You might want to pause a second to reflect on that statement.

In his book Paul O'Neill revealed that 'Reality lags perception' was actually a guiding principle of the past administrations. If your not familiar with a guiding principle I read a book 'Fast Company' on them, they are a jig that anyone in the organization can run data through to make a decision without a boss having to delay the yes/no process.

We are going to war for:

Perception #1 Weapons of Mass Destruction,

Perception #2 to democratize Iraq,

Perception #3 to fight terrorism.

I think terrorism is the most recent reason, I might have missed a few or lost track. There have been so many reasons that I can't keep up. Regardless of the perception de jour, the reality is that 5,000 of our soldiers have died and many more are still in harms way. Of course, I must be geographically challenged because I thought that the kin to the people who they let fly on 9.12.2001 (when everyone else was grounded) was in Pakistan or Afghanistan, not Iraq.

Personally, I'm a big boy, I can take the truth and I imagine everyone else can, I think we are in Iraq because if we weren't there would be a lot less oil on the market and the world's economy would be suffering even more.

...if we continue along the present course, the safety of American troops in the region, of our friends and allies like Israel and the moderate Arab states, and a significant portion of the world’s supply of oil will all be put at hazard.

Oil, to the State Department is a matter of National Security.

I would not dissagree with them on that.

But I digress, I'm not writing a political statement, I'm simply stressing that we go to war for a reason not reason's that change when proved false. The Gulf of Tonkin incident that was later proved false, it created a war where 58,000 soldiers died - however the reason for going to war didn't change like underwear changes.

....and that the Gulf of Tonkin incident may well have been fabricated as a means of drawing the U. S. into the Vietnam war. All these things have been rumored for years, but Bamford draws upon all sorts of official sources to nail them down.

Again, this is how reality lags perception. And, if the perception is changed each week then the reality can lag even further behind. My 17 year old daughter is great at this when it comes to progress reports and school work. Keep on her, keep the perception from becoming fluid and we get a 3.95 grade average and advanced placement courses, let her change the story and the D+'s appear on the reality report card.

Today I shun the TV, I don't have cable or for that matter even a digital converter box. I try to stay away from the mainstream media and focus on 25 of what I consider to be the best economic blogs.

Jim Rogers, one of the world's greatest investors can say in 15 words what took me 45 words: "Getting your investment advice from the government or TV [and] you are bound to go bankrupt."

Until I heard him say that, I have to admit, I felt a little bit alone in my views on where I get my financial information from. Many friends would question me about this. Blogs to them are like yellow journalism. When a successful author and billionaire endorse what I believed to be true it is very reassuring.

By the way, that link I found on Michael Covel'sl b[l]og, it is part of his new movie "Broke, the New American Dream."

And, in case you missed it here is what I consider to be two better resons why I shun cable financial "reporting." I mean come on, when we have to go to a comedian for acurate financial data then who is the joke really on. Who is really the clown here?

Reality lags perception.

Today, when I visit the blogs I see two camps. Inflation and Deflation. Black and white, "A" or "B."

I myself see "C." We can and I think likely will have "hyper-inflation" as the result of a dollar collapse. I think it is underway right now. I'm talking a Zimbabwe style dollar collapse.

Austrian Economics taught us that if we increase (inflate) the money supply that the value of the money decreases and prices rise. To me this is the true meaning of inflation. I think the seashell story expounds on this.

Right now Camp A and Camp B seem mired in where the money is. If "we" destroy our dollar will it matter if the money leaves the banks or stays in the banks?

No.

Which brings us to the reality of the situation: We can not sell enough bonds to service our debt. Bond sales are anemic. They can not sustain a weekly offloading of a quarter of a trillion dollars of debt! When Paul O'Neill was fired $230,000,000,000.00 was pretty close to half of the entire projected deficit. Now we are exceeding a $1,850,000,000,000.00 deficit. A 1.85 trillion dollar deficit, and we can't find enough foreign or domestic bond buyers to service that massive shortfall.

We can't pay our bills!

One word, and one word only comes to my mind: Insolvent.

Nate Martin http://economicedge.blogspot.com/ has recently compiled a series of excellent readings about this weeks bond sales. After reading his articles which pointed out that foreigners were becoming net sellers I was on Barry Ritholtz's "The Big Picture" blog, another top blog in my Google RSS Reader. Barry had posted a piece by David R. Kotok, here is some of it:

1. Fed policy is on hold at Quantitative Easing (QE), which means short-term interest rates near zero and plenty of liquidity in the financial system. The Fed has said it will continue this posture for a period of time. Markets do not expect any change until well in to 2010 at the earliest.

2. The much-feared Obama healthcare initiative seems to be stalled. Markets are relieved, because this initiative, as it was presented, amounted to a huge transfer payment that would be funded by future tax increases. The tax hikes would come on top of those already discounted by markets. Lifting the double tax whammy has given stocks a boost.

3. Foreigners are buying US Treasury securities again, and that has quieted the fearmongers who have been crying that the US will be abandoned and the dollar will face a crisis. That may still occur, but the day of reckoning for our fiscal profligacy seems to be postponed. Markets like dodging this bullet.

I agree completely with point 2. Jim Puplava of the Financial Sense News Hour with John Loeffler has explained in detail that a 1.6 trillion dollar health care plan with no means of funding will not have a positive effect on our economy. While I'm sure that initially point 1 will keep rates down I'm less certain that Quantitative Easing is optional. I totally disagree with point 3. So I emailed David seeking clarification. He differs with Nate's view, but wasn't specific as to why.

As I’ve been mentioning in my reports on the flow of Treasury International Capital (TIC Flows), foreigners have been net sellers of our debt. This last report, released July 16th, shows a net outflow of foreign private capital of $82.2 billion and the outflow of foreign official flows were $15.6 billion.

[TIC Whitepaper on page]

Call me names, call me a fear monger - but the bottom line is I stand behind Nate's question: If the primary dealers are buying then where is the money coming from? It is a most valid question. If "we" have to counterfeit money to service our debt I have to be very honest - that frightens me. A lot! Maybe, just maybe I'd feel a little bit better if we didn't have falling revenues or if hiring was taking place where I was assured that revenues would pick up. But that isn't the case, and a good part of the bond sales are for the Regan era debt. In other words foreigners who bought bonds then - now have instruments which have matured - and we have to borrow money from them or print it to pay them. We do not have the money to pay them back. Instead we have a deficit that is many times larger.

I continued reading David's piece and I saw something that stood out. To me it had PERCEPTION written all over it:

At the end of next week, Peter Demirali and John Mousseau will join us at another sweet spot, in the village of Grand Lake Stream, Maine at Leen’s Lodge for the annual Shadow Fed fishing retreat (nicknamed Camp Kotok by Becky Quick). CNBC will be broadcasting live on Friday, August 7, starting very early in the morning and running for much of the day. We are 34 attendees, plus Steve Liesman, Matt Greco (a Squawk Box producer), and the CNBC crew. The attendees are by invitation only and have traveled from as far east as Abu Dhabi to as far west as Vancouver and Newport Beach and from as far south as Dallas. We have booked the entire camp and will be testing its capacity.

Like Jim Rogers said: "Getting your investment advice from the government or TV you are bound to go bankrupt." Like Mr. O'Neill said: "Reality (insolvency) lags perception (good market news)."

Take care, D. "Davos" Sherman Okst AKA a Fear Monger

Well, Sherman, all I can say in regards to Tokot’s piece is as I tell my kids, “You are who you hang around with!” Of course I say that to remind them to be careful or they may wind up hanging around drug dealers, and *that* would be exactly the shady type of characters he’s befriending on his little fishing expedition.

Very interesting piece, my only contention is that the hyperinflationary outcome is not assured in my opinion. Yes, I agree that the dollar in its present form is dead, well currently dead like a zombie, but its ultimate demise may occur differently than say Zimbabwe’s.

For that to happen, we must first get past the DEBT that is keeping the VELOCITY of money at historic lows, and we must see wages rise for the spiral to begin. Right now the risk is still a downward spiral in my opinion, despite the current moonshot in equities. But we’ll see… I would like to read more of your thoughts, you put them together well! Thanks for sharing!

Each day Davos shares his thoughts and best links with the readers of ChrisMartenson.com . Here’s today’s daily digest , I read it everyday and get a lot of my information there, I would politely suggest that you do likewise. You can find the link under my favorite blogs listing that automatically updates when Davos posts.

And you know that we have to give Davos the Royalty treatment here… so I think it’s only fitting that we royally “tune him up.”

Tom Petty – All the Wrong Reasons (ht Raven):

Trouble blew in on a cold dark windIt came without no warningAnd that big ol' house went up for saleThey were on the road by morningOh, the days went slow, into the changing seasonOh, out in the cold, for all the wrong reasons

Well she grew up hard and she grew up fastIn the age of televisionAnd she made a vow to have it allIt became her new religionOh, down in her soul, it was an act of treasonOh, down they go for all the wrong reasons

Where the sky begins the horizon endsDespite the best intentionsAnd a big ol' man goes up for saleHe becomes his own inventionOh, the days go slow into the changing seasonOh, bought and sold, for all the wrong reasonsOh, down they go for all the wrong reasons

While I love Petty’s lyrics, finding decent videos of his is extremely difficult. Some artists/labels are keeping their music tight, while others, like the Eagles, are very loose with letting the public share their videos. While I sympathize with their right to protect their income stream, I think we all like the access to their art.

So, I am taking a new tact as videos get harder to find, namely when I can’t find the tune I want, I’m going to start using some of the good “cover” music from amateurs that I find. Some it may not be as good, but some of it is better. Here’s an example of a piece of music from an amateur who did all the tracks himself… nice evening music and you can even understand the lyrics!

There is no doubt that investors are feeling quite exhilarated from the recent wave up. The 1966 cartoon titled “Out and Out Rout” featuring none other than Wile E. Coyote and the Roadrunner comes to mind when comparing the recent drag racing to the top. Investors (gamblers) are chasing the absolute dream of higher returns in the same way that the coyote is addicted to catching the bird.

Fast market action stimulates quick decisions. Are they well planned or is risk thrown at the wind?

Take a step back and study the recent evolution of markets. It becomes clear that a combined bond +currency +commodity +stock index has peaked since early June. The fundamental weakness is appearing under the surface for those who only watch the major stock indices. Stocks will always be the last segment to follow. Bonds and currency markets are a lot more sensitive to change. We see contraction in broad monetary aggregates after a few months of bouncing around.

Banks have cut back on their loan book in the second quarter. Bank credit is contracting even more for the third quarter as shown in weekly data. Transportation indices such as the American Trucking Association, Baltic dry etc are also pointing south again. Consumer surveys show the general anxiety of employment losses and tight credit.

In his pursuit of the Roadrunner, the obsessed coyote is at the wheel of a dragster. After a few passes on the desert roads, they venture up a mountain. Drag racing to the top, the smart bird stops and let the roaring Wile E continue on a rocket launch off the top of the mountain and into free space.

Laws of gravity still applies, don’t be a Wile E. Coyote...

Yves Lamoureux, Investment Advisor, Blackmont Capital

The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CI Financial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.

Let’s face it, financing $235 billion in one week is a tall order – too tall it turns out as yesterday we had a 5 year auction that essentially FAILED but was largely ignored by the mainstream… again.

Karl Denninger covered this event well, so I’ll send you over to read up on what happened at his Market Ticker: US 5yr Bond Auction Effectively FAILS . Make sure you read and understand that!

But here’s the real deal… the money to purchase all those Treasuries DOES NOT EXIST. It particularly does not exist if we are simultaneously going to push equities higher. It is my contention that we are on the edge and that there is a game being played by the Fed, the Treasury, and by the Primary Dealers to mask over reality.

As I’ve said, foreigners are not buying, so the money has to come from somewhere and the math is NOT adding up. The latest Bloomberg article on the subject this morning seems to confirm the fact that foreigners are still not buying as reflected in the TIC data, “Interest from an investor class that includes foreign central banks declined at each of the auctions from last month.”

July 30 (Bloomberg) -- Treasuries fell, pushing the yield on seven-year notes to near the highest level in more than a month, as the U.S. prepares a $28 billion offering of the debt amid concern the deluge of supply will overwhelm demand.

Ten- and 30-year debt fell for the first time in three days before the auction, the last of four this week totaling a record $115 billion. Sales in the past two days drew higher-than- expected yields. The Treasury will announce on Aug. 5 the amount of money it intends to raise at its quarterly refunding. Continuing claims for unemployment benefits fell in the week ended July 18 to the lowest level since April.

“The auctions certainly haven’t helped sentiment any,” said Ira Jersey, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers that trade directly with the Federal Reserve. “We’re going to get the refunding announcement next week, and I think some people are a little nervous about that at these levels.”The yield on the seven-year note rose four basis points, or 0.04 percentage point, to 3.34 percent at 8:45 a.m. in New York, according to BGCantor Market Data. The 3.25 percent security due in June 2016 fell 1/4, or $2.50 per $1,000 face amount, to 99 14/32.

The number of Americans filing claims for unemployment rose 25,000 last week, higher than forecast, to 584,000. The level of continuing claims decreased by 54,000 to 6.197 million in the week ended July 18.

The Treasury sold $39 billion of five-year securities yesterday, $42 billion of two-year debt on July 28 and $6 billion of 20-year Treasury Inflation Protected Securities on July 27.

Interest from an investor class that includes foreign central banks declined at each of the auctions from last month. Indirect bidders bought 36.7 percent of the five-year notes sold yesterday, down from 62.8 percent at the June sale, which was the highest since December 2004. The same class of investors purchased 33 percent of the two-year notes offered this week, compared with 68.7 percent in the previous auction in June.

“For the second successive session, the Treasury market was knocked violently out of its stride by a weak auction, with low indirect bids,” said John Wraith, head of sterling-rate product development at RBC Capital Markets in London.

The seven-year securities scheduled for sale today yielded 3.38 percent in pre-auction trading, compared with 3.33 percent at the previous sale of the maturity on June 25.

Quarterly Refunding

The Treasury’s Aug. 5 announcement will detail the amount it plans to raise at its quarterly refunding through the sale of debt maturing in 3-, 10- and 30 years. Sales of those maturities have become monthly, raising $65 billion in July, as the U.S. tries to fund a record budget deficit. The next sales will be held on three consecutive days beginning Aug. 11.

The U.S. raised $1.02 trillion this year selling Treasuries, government data show. The budget deficit is projected to reach $1.85 trillion in 2009, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Goldman Sachs Group Inc., a primary dealer, predicts the U.S. will sell about $2.9 trillion of debt in the two years ending September 2010 after it cut its estimate for Treasury auctions by 28 percent on the nation’s economic prospects.

Treasuries pared losses as the Federal Reserve prepared to buy notes maturing from May 2012 to November 2013 today.

‘Extremely Attractive’

Longer-maturity debt gained yesterday as the Fed purchased $2.999 billion of Treasuries maturing between February 2021 and February 2026 as part of its plan to cap borrowing costs. The central bank bought $222.719 billion in Treasuries since its purchases began March 25.

Treasury two-year notes may rise because policy makers are likely to leave interest rates unchanged for a prolonged period, according to Daiwa Securities SMBC Co., a unit of Japan’s second-largest brokerage.

Two-year note yields are 94 basis points above the upper range of the Fed interest rate, the widest spread in more than a month, according to data compiled by Bloomberg. That spread may narrow to 65 basis points, Nagai said.

BlackRock Favors TIPS

BlackRock Inc., the biggest publicly traded U.S. money manager, favors U.S. TIPS with maturities of 10 years or more and U.K. index-linked gilts due between 5 and 10 years, said Brian Weinstein, a fund manager based in New York.

Federal-funds futures contracts on the Chicago Board of Trade show a 57 percent chance policy makers will leave borrowing costs unchanged by year-end. The odds were 50 percent a month earlier.

Investors should favor debt and stocks of “strong” companies because U.S. economic growth will be closer to 3 percent than the range of 5 percent to 7 percent for the past 15 years, said Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co.

“There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,” Gross wrote in his August investment outlook on Pimco’s Web site.

U.S. corporate bonds rated A to AAA by S&P returned 7.3 percent this year, according to indexes compiled by Merrill Lynch & Co., as the economy improved and investors sought higher yields than those offered by government debt. Merrill’s U.S. Treasury Master Index posted a 4.9 percent loss.

LOL, I love watching the games Bill Gross plays. He’s a seller, no, he’s a buyer. You should own bonds… no, bonds are destined to go down. Clown. Here’s a tip – whatever Bill Gross says, just do the opposite, that’s what he’s doing.

While they can technically go slightly lower than zero, we are at the end of an era. Sure, interest rates can stay low for quite some time, but NOT when you can’t pay your debts. And trust me, we cannot possibly pay $235 billion per week forever. We are bankrupt, and interest rates are going to rise at some point, that’s why TLT is down over 24% from its peak. Rates are being held artificially low, and that simply cannot be sustained.

What I don’t like is that the numbers are not adding up and there is no transparency as to where the money is coming from. This is no joke, this is a very, very serious issue, one with criminal and traitorous implications. The Fed, the Treasury, and the Primary Dealers need to be audited, and it needs to happen NOW.

The pumpers and pundits see such massive debt auctions go off "successfully" and without bothering to add up the math mistakenly conclude that all will be well with the world and that equities will rise on the back of such money pumping. Sure they will, just like a drunk or a drug addict will get really high just before they hit the floor.

The Animals - The House of the Rising Sun (1964):

Now the only thing a gambler needsIs a suitcase and trunkAnd the only time he's satisfiedIs when he's on a drunk

Oh mother tell your childrenNot to do what I have doneSpend your lives in sin and miseryIn the House of the Rising Sun

You can see that they climbed steadily all night long, a favorite way for the larger players and their computers to move the market over resistance. Both the dollar and bonds are down slightly.

Initial jobless claims rose to 584,000, above last week’s revised higher 559,000. At least Econoday is correctly mentioning that the drop in continuing claims is due to people falling off the roles and NOT due to new employment:

HighlightsFirst-time jobless claims jumped 25,000 to a roughly as-expected level of 584,000 (prior week revised 5,000 higher to 559,000). The Labor Department told Market News International that the results are a "return to trend" following earlier-than-usual auto layoffs that had skewed claims lower in the prior four weeks. Still, if the high 500s is the new trend, this indicates easing layoffs from the mid 600 level before the distortions appeared. Continuing claims fell 54,000 to 6.197 million, much lower than prior weeks but likely reflecting the expiration of benefits and not necessarily new employment. The unemployment rate for insured workers was unchanged at 4.7 percent, down from an earlier peak in the low 5 percent range. Markets popped up and down in reaction to the results which offer an uncertain hint that next week's monthly employment report will show moderation in job losses.

I expect resistance at 983, which is about where it’s looking to open, and then again at or near the 1,000 mark on the SPX (like Seth’s 999). The pivot points on the up side are at 990 and then 1,018. On the down side the next lower pivot is at 961.

Oil was hammered yesterday as we learned that supply is rising and demand is falling… here’s the Point & Figure chart for oil, the technical price target it derived is way down at $44 a barrel:

I’m also paying attention to China right now. You know that equity prices crashed and now the rebound is just out of control, as in parabolic. It’s an obvious bubble forming and I think that bubble is due to break soon, but like any parabolic move, front-running it is not wise. That said, there are signs that it may be topping now or getting close to topping, although the P&F chart of the Hang Seng is just scary and as you can see, the price target is still a ways higher:

Of course the Chinese are the ones who wisely and intentionally pricked the first bubble. Unfortunately, they seem to like the extremes:

Wednesday, July 29, 2009

As I’ve been mentioning in my reports on the flow of Treasury International Capital (TIC Flows), foreigners have been net sellers of our debt. This last report, released July 16th, shows a net outflow of foreign private capital of $82.2 billion and the outflow of foreign official flows were $15.6 billion.

July 16 (Bloomberg) -- International demand for long-term U.S. financial assets weakened in May as investors sold the most Treasury notes and bonds in six months.

Total net sales of long-term equities, notes and bonds were $19.8 billion in May, compared with net purchases of $11.5 billion a month earlier, the Treasury said today in Washington. Net selling of government notes and bonds totaled $22.6 billion, the most since sales of $25.8 billion in November, after net buying of $42 billion in April.

As investors abroad dumped long-term Treasuries, purchases of U.S. stocks in May were the strongest pace since January 2008. The Obama administration is selling a record amount of government debt to finance a budget deficit that’s projected to approach $2 trillion this year, raising concern about American fiscal policy and spurring purchases of shorter-term U.S. debt.

Meanwhile the Fed is issuing $150 to $235 billion in new debt each and every week. Granted, long bonds, as measured by TLT, are down 24% ytd, yet bonds have yet to really fall off the edge as far as price or to shoot the moon in terms of interest yield.

What we’ve been noticing is that the amount of money at each auction is increasing from the Primary Dealers who are surrogates of the Fed. And, in fact, when we look at the chart from the Fed showing the amount of U.S. Government Securities at all Commercial Banks, we do see a parabolic rise and a steady increase up to the latest $1.3 Trillion mark:

Now, as much as $1.3 trillion is, in the last two years this amount appears to have “only” grown by about $200 billion total. So I’ll ask the question again; WHERE’S THE MONEY COMING FROM?

Net withdrawals from foreigners (most recent data unknown), and roughly $200 billion increase in the past couple years at commercial banks which would include the primary dealers. It’s being suggested that the Primary Dealers are simply going to borrow the money from the Fed, turning around and lending it back to them at a higher rate while skimming the difference. If that is true, and it probably is, then it’s going to end very badly when that circle is broken.

I say again, it’s time to audit the Fed, the Treasury, and the Primary Dealers by an INDEPENDENT AUDITOR, if such an animal can be found.

Always 2 to 6 months behind, a mostly after-the-fact study done by the Federal Reserve Bank of New York has some interesting research, comments, and charts – all of which point to a severe downturn in the leverage of Commercial Banks and a precipitous drop in the amount of debt that was being securitized towards the end of last year.

This deleveraging is at the heart of why, despite massive increases in the money supply, deflation and not inflation has been occurring across most asset classes that are dependant upon financing – things like homes and commercial real estate.

Here are some pertinent charts from the report…

Note that the issuance of asset backed securities cliff dove all the way to zero by the beginning of this year:

The Growth Rate of Asset Backed Securities went negative at the end of 2008:

Leverage at the Primary Dealers had declined precipitously by year’s end.

These charts do not include what is occurring now. I do believe that a great deleveraging is occurring, but I believe the large banks in particular are far more leveraged than the above chart would indicate – still. Zombie banks, while they are trying furiously to reignite the shadow banking system are fighting the math of parabolic collapse. Despite their best efforts, I don’t believe they are going back to a period of never ending growth anytime soon. As Kondratieff would say, it’s not the time of the season!

In yet another “no-duh” moment, the politicians who are paid by you to supposedly work for you are finally waking up to yet another central bank scam. I wrote about this in real time as it was happening last year, no one paid attention.

Criminal, Traitor, and former Secretary Treasurer of the United States, Hank Paulson, pushed for and received the right to PAY BANKS FOR THE MONEY THEY HOLD IN RESERVE.

Here’s the resultant chart of “Excess” Reserves:

Can you guess when they started paying money for reserves?

Now, let’s set the record straight… it’s a huge advantage to the banks to be able to use their “fractional reserve system” in the first place. In fact, it’s actually one giant Ponzi scheme, but let’s ignore that. Banks, by charter, are granted the right to lend out more money than they possess – that is how they make their money, and it’s also how most of the money (credit money) is made.

Along comes the financial crisis and Paulson begins lobbying to PAY THE BANKS FOR THE MONEY THEY ARE REQUIRED TO HOLD IN RESERVE. This is a concept that is JUST CRIMINAL! Again, banks make plenty of money (too much w/o usury laws) simply by lending money they don’t have – that’s a right only a chartered bank has, you and I don’t have that ability. Yet, all of a sudden it makes sense to use OUR MONEY to pay them interest on the money they hold so that they can loan US money at usurious rates? HUH???

At any rate, the appropriate palms were lubed and this SCAM made it past the politicians who are now complaining about it.

Kucinich - the Federal Reserve is paying banks NOT to make loans, " One Fraud after Another"

Naturally, the banks didn’t want to HOLD MONEY without interest because they know what they and the Federal Reserve are doing to devalue our money. So, there they were holding massive NEGATIVE RESERVES for the first time in history (the charts and definitions were changed during this timeframe by the Fed). Along comes paying for reserves and what was massive negative reserves turns into an instant historic surplus!

No one but me (that I know of) wrote about it at the time and I even had many commentators respond that it was appropriate to pay banks interest on their reserves! NO IT’S NOT! The banks are REQUIRED to hold reserves as a premise of their ability to be a bank! They do not and should not ever be paid to hold reserves, much less at a higher rate of interest than they can receive elsewhere.

Again, watch Paulson’s personal investments and see who profits. I repeat - Criminal and Traitor.

Jefferson Airplane – Somebody to Love (When Truth is Found to be Lies):

PS - Why is it that the "EXCESS RESERVES" totals more than $750 billion, but the "NON-BARROWED RESERVES" only totals $150 billion? Could it be that there is over $600 billion in BARROWED RESERVES? Of course, that's what all the government bank bailout loans are for. Yet, we are paying them money for the reserves on which they borrowed from us so they can lend it back to us at a higher rate??? Did you follow that? Ludicrous!

July 29 (Bloomberg) -- Orders for U.S. durable goods, excluding automobiles and aircraft, unexpectedly rose in June, signaling manufacturing may expand in the second half of the year.

Excluding transportation equipment, demand for goods meant to last several years climbed 1.1 percent, the most in four months, the Commerce Department said today in Washington. Total orders fell 2.5 percent, the first decrease in three months.

So, EXCLUDING one of our largest segments it was slightly positive on a month to month basis, but OVERALL it was TWICE as NEGATIVE as the positive which they reported!

Oh, and on a year over year basis the PLUNGE ACCELERATED to a NEGATIVE 26.8% IS ALL! YET, look at that headline!!!

I am personally SICK OF THE BULL. LIES, SPIN, AND DISTORTIONS PILED UPON ONE ANOTHER.

I can’t even view the television any more – any of it! CNBC is worse than worthless. The evening “entertainment” is nothing but complete drivel brought to you by never ending corporate interruption.

Jim Rogers - "Getting your investment advise from the Government or from T.V., you're bound to go bankrupt!"

But it’s not just the business media that’s gone completely over to mindless corporate drivel. It’s almost every program on all 10,000+ channels! Newspapers are dead. Television, as far as I’m concerned, is dying and will follow newsprint into the abyss.

Bloomberg, who used to be a source that I considered to be better than the rest is falling prey to corporate interests and is shooting itself in the foot by running stories and headlines like the one above. Can’t handle the truth? You will go the way of the dinosaur.

Oh, and here’s the truth – Durable Goods Orders were DOWN 26.8% year over year. Here’s the chart, does that look like the end of a recession?